Personal Loan is a preferred borrowing option among most consumers as it comes with no end-usage restriction (except for speculative purposes), minimal documentation and quick loan disbursal. However, the unsecured nature of personal loans increases the lenders’ credit risk, as they do not have an underlying asset to rely on if the borrower defaults on his loan. Therefore, lenders exercise extra caution while evaluating personal loan applications. Apart from the usual parameters like age and monthly income, various aspects of their applicants’ credit profiles are also considered while assessing their loan applications. Here are some key parameters that lenders use for evaluating personal loan eligibility.
Credit Score
Banks/NBFCs usually consider the credit scores of their personal loan applicants to assess their creditworthiness. Lenders usually prefer sanctioning personal loans to individuals having higher credit scores, i.e, 750 and above, as such applicants are considered as financially disciplined. Some lenders also offer lower interest rates to applicants with higher credit scores. For example, the HDFC Bank Personal Loan interest rates may be lower for loan applicants with higher credit scores and vice versa. Lenders either reject the personal loan applications of those having lower credit scores or approve their personal loans at higher interest rates.
As the need for availing a personal loan may arise anytime, especially in case of financial or medical exigencies, you should keep track of your credit scores by fetching your credit reports from credit bureaus at regular intervals. You can also visit online financial marketplaces to check your credit scores. Fetching your credit report and reviewing it periodically will help you to identify any clerical error, incorrect information or fraudulent credit activity and report it to both the concerned credit bureau(s) and lender(s) for rectification. A rectified credit report will increase your credit scores and thereby, improve your chance of availing personal loans at lower interest rates.
Loan Repayment Capacity
Lenders also consider the repayment capacity of their personal loan applicants while assessing their loan applications. Banks and NBFCs prefer approving personal loan applications of individuals whose monthly loan repayment obligations, including the EMI of the proposed personal loan, are within 50-55% of their net monthly income. Lenders may reject the personal loan applications of those who exceed the above-mentioned limit or sanction their loans at higher interest rates. To improve their chances of availing personal loans, such applicants can choose longer repayment tenures and/or lower loan amounts. Doing so will decrease their EMI obligations, which will subsequently improve the loan applicant’s repayment capacity.
Prospective borrowers can use the personal loan EMI calculator, either available online on lender websites or on financial marketplaces, to determine the optimum EMIs and loan tenure for their proposed personal loan while ensuring that their total loan repayment obligations are within 50-55% of their net monthly income.
Employer & Occupation Profile
Personal loan lenders also look into the occupation profile of their loan applicants’ during the loan evaluation process. Some lenders also consider their applicants’ occupation profiles while setting the interest rates of their personal loans. Lenders usually prefer approving personal loans to salaried applicants due to their higher income certainty. Among salaried personal loan applicants, those working with government or in public sector undertakings have higher chances of availing personal loans, followed by applicants employed with MNCs and other reputed private sector companies. Among non-salaried personal loan applicants, professionals like doctors, chartered accountants, doctors and architects have higher chances of securing personal loan approval at lower interest rates. Lenders may reject personal loan applications made by individuals whose occupation or employer profile is not included in the list of preferred employer/occupation profiles.
Job/Business Stability
Lenders usually prefer approving personal loans of self-employed applicants having a business vintage of 3 years and above. While in case of salaried professionals, the applicants are required to have a minimum work experience of 1 to 3 years. Some banks/NBFCs also require their loan applicants to have worked for at least 6 months to 1 year in their current organisation.
Hence, those planning to avail personal loans in the near future should avoid job changes. Here it needs to be noted that lenders usually do not approve the personal loan applications of those who change their jobs frequently as job instability increases the credit risk for lenders.
Existing consumer relationship with banks and NBFCs
Many lenders prefer sanctioning personal loan applications of their existing customers. Some lenders also offer pre-approved personal loans to select existing customers at concessional interest rates provided they fulfil the eligibility criteria. Therefore, existing customers looking to avail personal loans should first get in touch with their respective banks or NBFCs with whom they share deposit or lending relationships, to find out whether they are eligible for availing personal loans. If yes, then those personal loan offers can be used as a benchmark for comparing the personal loan schemes offered by other lenders.
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